The truth is finally starting to emerge about socially responsible investing

Money is pouring into sustainable investments, which has surged by more than $2 trillion in the last two years. Demand is growing as clients want to increasingly invest responsibly.

Yet investors have heard the argument before: Socially responsible investments don't perform as well as traditional stock market funds. If you want to feel good about the stocks you're holding, you'll pay the price in lower performance.

The truth is finally starting to emerge about how bad SRI really is: It's no worse than any other approach to investing. Investors should not expect to do better than traditional stock investing, but as long as fees are not too high, there is no reason to expect a broad-based SRI investment to perform worse than a traditional stock portfolio.

CNBC reviewed years of Morningstar data on the performance of socially responsible funds versus traditional funds and benchmarks and found that there is no significant performance drag.

With one key caveat: Funds designed to exclude stocks, such as the "sin" sectors — no tobacco, alcohol and guns — don't tend to measure up.

Jon Hale, head of sustainability research at Morningstar, said academic research has shown that stock exclusion tends to be a negative factor in performance, while companies that score highly on ESG metrics (environmental, social and governance) show performance that is consistent with traditional benchmarks.

"The ESG performance of companies appears to be something that can be used to generate value in a portfolio; traditional exclusion can be a drag," Hale said.

In other words, it's better to identify reasons to invest in a stock than harp on reasons to avoid owning one.

"The weight of academic research on the performance of sustainable/responsible portfolios, mutual funds and indexes suggests that there is no performance penalty," Morningstar wrote in a 2016 report on SRI investing.

Similar research goes further back: A 2013 meta-analysis of 25 primary studies on socially responsible investment performance found that roughly 75 percent showed no significant performance difference — either out- or underperformance. A 2015 meta-analysis covering 85 studies reached a similar conclusion that there's neither a big cost, or benefit, to investors.

"There is no significant relationship between SRI and performance," the authors wrote. "The adoption of ESG standards does not generate notable costs or benefits for an investor
with a global perspective, challenging the theory of SRI inefficiency, which implies poorer
performance due to a limited investment universe."

Hale said as ESG algorithms become better and SRI funds gravitate more to finding better companies rather than excluding bad ones, there's reason to believe these funds may not only continue to keep up but more often beat conventional funds.

"In the past, these portfolios haven't fully reflected the idea that it does improve an individual company's bottom line, but the ability to identify these things really only became sophisticated recently," Hale said. "The process of collecting and understanding information on company performance on ESG has definitely entered the realm of big data. ... Going forward it may be more likely to result in outperformance."

The big hurdles will continue to be that any active manager — whether SRI or not — will struggle to beat an index fund, and these funds as a rule are more expensive than the "rock-bottom prices of simple Vanguard portfolios," Hale said.

Hale said for now a performance edge may be easier to achieve in markets where companies are less likely to be driven by ESG as a general societal principle — for example, Europe versus the United States. "Lots of international large-cap companies that find their way into these ESG funds are sustainability leaders, relatively speaking, so there may be less differences even if a traditional international manager isn't even trying. Basic holdings in international large-cap will be similar. It's less so in the U.S. now."

The iShares MSCI EAFE ESG Optimized (ESGD ) ETF, which has 451 holdings based on ESG traits, is notching nearly similar returns to the parent index. Nestlé and Roche Holdings are its largest holdings. The expense ratio of 0.40 percent is only slightly higher than the iShares MSCI EAFE (EFA ) ETF's 0.33 percent annual fee. The ESG version of the EAFE index fund has turned in virtually the same performance year-to-date, though it lacks performance history, having launched less than a year ago.

A rougher ride the more narrow you slice it

Investors who seek to capture social trends by investing in alternative energy funds specifically, such as wind and solar portfolios, can expect wild volatility. But there is a way to capture that theme within a broader fund that has a better chance of keeping up performance-wise, even if it uses an exclusionary approach to stock selection.

Take the SPDR S&P 500 Fossil Fuel Reserves Free ETF (SPYX ). It's doesn't hold stocks that own oil, natural gas and thermal coal reserves. So investments in sectors like technology and financials are slightly higher than the S&P 500. Apple and Microsoft are core holdings in the 473-stock fund, but Exxon isn't.

So far this year, the SDPR fund logged a 10.93 percent return versus 9.93 percent for the traditional index ETF, the SPDR S&P 500 (SPY ). And at an expense ratio of 0.20 percent it is fairly inexpensive, though still significantly more than SPY's 0.10 percent annual fee.

"The fund underweights energy and utilities and overweights other sectors," said Chris McKnett, head of State Street's global ESG investments business. "But you still get broad exposure." More investors have wanted to divest from fossil fuel reserves in the past 12 to 18 months, he said.

Daniel Kern, chief investment officer at TFC Financial Management in Boston, said though the ETF uses exclusion of stocks as an approach to portfolio selection, it remains well-diversified.

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International versions of a similar strategy, such as the SPDR MSCI EAFE Fossil Fuel Reserves Free (EFAX ) and SPDR MSCI Emerging Markets Fossil Fuel Reserves Free (EEMX ) ETFs, kick out carbon but are highly diversified portfolios. Performance-wise, they've slightly outperformed their parents, and they also have low expense ratios.

"The funds can become core parts of investors' portfolios," McKnett said.

That's easy to say right now given the prolonged slump for oil: The energy sector SPDR (XLE) is down 10 percent in the past three-year period, according to Morningstar.

"They're really new," said Todd Rosenbluth, director of mutual fund and ETF research at CFRA. "So there isn't much history."

Narrow investment focuses generally mean a rougher ride for investors.

Guggenheim Solar (TAN ), the largest ETF in solar energy, holds many smaller international stocks, which can be highly volatile. It is up roughly 10 percent this year per Morningstar but down more than 22 percent over the past three years. A net expense ratio of 0.71 percent also worries experts.

"There's so much exposure to volatile emerging markets," said Neena Mishra, director of ETF Research at Zachs Investment Research.

"Wind and solar have had very bumpy rides," Kern said. "Their concentrated offerings mean that they're vulnerable to the ups and downs of renewables."

For investors who stay away from the niche socially responsible plays and focus on broadly-based counterparts to traditional stock funds, there's no performance penalty.

"Getting comparable performance and feeling better about socially responsible investments is a win for investors," Rosenbluth said.

As long as an investor's definition of winning means just keeping up.

— By Constance Gustke, special to CNBC.com